Detroit water bond exchange approved by bankruptcy judge

Detroit can exchange at least $1.67 billion of its water and sewer debt for new bonds, a federal judge ruled today, removing one more hurdle in the city’s path to exiting its record municipal bankruptcy.

The city won approval of the deal in federal court in Detroit, a week before it starts a trial on its plan to cut debt and exit bankruptcy. The decision by U.S. Bankruptcy Judge Steven Rhodes allows the city to buy back or pay off early about 92 percent of the water and sewer bonds it was targeting with a repurchase offer that ended last week.

Should the city succeed this week in selling new bonds to finance the deal, a group of four bond insurers and investors will drop their opposition to the debt-cutting plan when the trial opens Sept. 2. If the sale fails, the city can still go ahead by borrowing money from a unit of Citigroup Inc., Heather Lennox, an attorney for the city, said today in court.

Detroit’s 5.25 percent water bonds due in 2014 climbed 4 percent today to 98.8 cents on the dollar, according to data compiled by Bloomberg.

Syncora Guarantee Inc., which wanted to fight the deal, insures part of the city’s pension debt but not the water and sewer bonds. Syncora said it might be affected because the department of water and sewer will help pay for notes that may be issued as part of the overall debt-cutting plan.

Not eligible

Rhodes ruled the company isn’t eligible to fight the deal because it has no financial interest in the water and sewer bond arrangement.

Under the proposal, the water and sewer department would buy back or redeem $1.67 billion of about $5 billion in bonds, Lennox said. The bonds not repurchased would be honored and repaid without any change, Lennox said.

The refinancing would save $11.4 million a year for the first 19 years of the deal, Nicolette Bateson, chief financial officer for the water and sewer department, said today in court. The refinancing would also raise $150 million for projects to improve the city’s sewage system.

Bondholders had until Aug. 21 to agree to sell back their bonds to the city. Had too few investors agreed, the city said, it would have ask Rhodes to impose changes to the bond terms.

Bondholders balked at the city’s debt-adjustment plan, which seeks to cut interest rates on some securities or scrap provisions that protect investors from being forced to resell bonds before they mature. The proposal led the three biggest credit raters to lower their grades on the bonds to junk.

The entire deal should close by Sept. 4, should investors buy the new bonds.